Download Northern Trust

NORTHERN TRUST
2013
CBOE’s 29th Annual Risk
Management Conference Agenda
Equity Risk Management
Single Stock Concentration Solutions
Mike Leon, Senior Vice President
312/444-3858
[email protected]
© 2013 Northern Trust Corporation
northerntrust.com
Tax Disclaimer
Investors
are strongly
advised to consult their tax
and legal advisors in
considering the tax
consequences of their own
specific circumstances.
2
Overview of Presentation
3

Market Trends

Low Basis Single Stock Case Study

Issues on writing calls on Portfolios
2013 Key Market Trends
Clients
are becoming more focused on after tax
returns
Tax
deferral strategies are gaining more importance
Clients
Income
preferring exchange traded products
generation high priority for high net worth
investors
4
Case Study Single Stock Hedging
Client
Fact Pattern
 Owns
200,000 shares of XYZ @$90 per share value $18
million
 Looking
to move into a diversified portfolio and increase
income thru covered call writing
 Cost
Basis $7.0 million . Federal Tax $2,618,000 liability State Tax $600,000
 Leaves
$14,782,000 or 82.1% available for reinvestment
 Market
Cap Large
 Dividend
 Implied
5
Yield 2.50%
at the money 1 yr. vol 15
Hedging Strategy
 Enter
into a 1 year Zero cost collar using Flex options or
200,000 of XYZ stock price $90 position value $18 million
Put
Strike 90% $81
Call Strike 103.13% $92.82
Put
Strike 85% $76.5
Call Strike 106.25% $95.63
American style makes the call worth more giving more upside
Need to manage the early exercise risk
Borrow
Rate
$14,782,000
1.75% or $258,865
Dividend
Positive
 TAX
on $18,000,000 @2.5% or $450,000
carry of $191,315 or 1.06%
STRADDLE RULES WILL APPLY
 Investors
are strongly advised to consult their tax and legal advisors in
considering the tax consequences of their own specific circumstances.
6
RE-Investment Strategy
 Buy
 Sell
S&P 500 (“SPY”) ETF
qualified covered calls
Calls
Sell
SPX Index calls
Calls
 When
Taxed as short term gain or losses
not considered qualified
the stocks contained in a stock index and a portfolio of stock
"substantially overlap," offsetting positions in the portfolio of stocks and in
instruments based on that index will be subject to the anti-straddle (including the
loss deferral) rules. Treasury regulations provide an objective mechanical test to
determine the amount of overlap between the portfolio and the index and the
extent to which the anti-straddle rules apply.
7
Important Disclosure Information
Mike Leon, Managing Director
312-444-3858
Mike Leon is a registered representatives of Northern Trust Securities, Inc. In the
event you have an interest in pursuing a hedging strategy, you will be advised by a
registered representative of Northern Trust Securities, Inc. (NTSI), an Affiliate brokerdealer of Northern Trust, regarding this approach.
Northern Trust Securities, Inc. is a member of SIPC, FINRA, and is a subsidiary of
Northern Trust Corporation.
8
Important Disclosure Information (cont.)
Structured securities, derivatives and options are complex instruments that are not suitable for every investor, may
involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable
of understanding and assuming the risks involved. Supporting documentation for any claims, comparisons,
recommendations, statistics or other technical data will be supplied upon request. Any trade information is
preliminary and not intended as an official transaction confirmation. Please read the Options Clearing
Corporation’s disclosure document http://www.cboe.com/LearnCenter/pdf/characteristicsandrisks.pdf.
Please consult your tax advisor before making investment decisions based on the information provided and for tax
reporting purposes. Investment products and services are offered through Northern Trust Securities, Inc., member
FINRA and SIPC and a subsidiary of Northern Trust Corporation. For more information, please contact your
Investment Consultant or call 800-621-4482.
The strategies mentioned here may help to decrease the risk of your investments, however, they may also limit the
upside potential of your investments.
Risks:
Call or Put Purchasing: The risk of purchasing a call/put is that you will lose the entire premium paid.
Uncovered Call Writing: The risk of selling an uncovered call is unlimited and may result in losses significantly
greater than the premium received.
Uncovered Put Writing: The risk of selling an uncovered put is significant and may result in losses significantly
greater than the premium received.
Call or Put Vertical Spread Purchasing (same expiration month for both options): The basic risk of effecting a long
spread transaction is limited to the premium paid when the position is established.
Call or Put Vertical Spread Writing (same expiration month for both options): The basic risk of effecting a short
spread transaction is limited to the difference between the strike prices less the amount received in premiums.
Call or Put Calendar Spread Purchasing (different expiration months and short must expire prior to the long): The
basic risk of effecting a long calendar spread transaction is limited to the premium paid when the position is
established.
9
Important Disclosure Information (cont.)
This material is for informational purposes only and is not intended to be an offer or solicitation. It is intended
solely for the information of those to whom it is distributed by Northern Trust Securities, Inc. (“NTSI”). No part of
this material may be reproduced or retransmitted in any manner without the prior written permission of NTSI.
NTSI does not represent, warrant, or guarantee that this information is accurate, complete or suitable for any
purpose and it should not be used as a basis for investment decisions. This material does not purport to contain all
of the information that a prospective investor may wish to consider. This material is not to be relied upon as such
or used in substitution for the exercise of independent judgment. Past results are not an indicator or guarantee of
future returns.
Alternative modeling techniques or representation is made that any account will or is likely to achieve profits or
losses similar to those shown. Alternative modeling techniques or assumptions might produce significantly
different results and prove to be more appropriate. Past hypothetical backtest results are neither an indicator nor
guarantee of future returns. Actual results will wary, perhaps materially, from the analysis. As a sophisticated
investor, you accept and agree to use such information only for the purposes of discussing with NTSI your
preliminary interest in investing in the strategy decision herein.
NOT FDIC INSURED
10
May lose value/No bank guarantee